Cordray, GOP clash on consumer lawsuits against banks

Monday

Aug 7, 2017 at 12:01 AMAug 7, 2017 at 6:21 AM

Jessica Wehrman Dispatch Washington Bureau @JessicaWehrman

WASHINGTON — Republicans are sharply criticizing a rule that would allow consumers to file class-action lawsuits against financial companies — the latest battle in an ongoing war between the GOP and a consumer watchdog agency headed by former Ohio Attorney General Richard Cordray.

In July, the Consumer Financial Protection Bureau issued a rule barring financial-services companies from inserting fine print into contracts that would effectively prevent customers from filing class-action lawsuits against them.

Currently, consumers with beefs are forced into arbitration — a process that involves a third party who negotiates an agreement between the company and the aggrieved.

Supporters of the new rule say few customers are willing to enter arbitration over a bank that erroneously charges, say, $20 and won’t refund the money. But if a bank is doing it systematically, a class-action lawsuit can stop them from doing so to thousands of consumers, they say.

Without being able to sue, Cordray says, “no justice is done, no deterrent achieved, no oversight of banks can be had.”

Opponents say the rule is an easy payday for trial lawyers, and it’s also a symbol of an agency with too much unchecked power.

Those critics — including Republicans and the banking industry — have been foes of the consumer bureau almost since the agency opened its doors in 2011. Because Cordray is appointed to a five-year term and Congress has no financial power over his agency, they say he is a one-man legislating machine.

“This is another example of where the CFPB has put a one-size-fits-all agenda that doesn’t work for consumers,” said Rep. Steve Stivers, R-Upper Arlington. “But it sure works for trial lawyers. If I was a trial lawyer, I’d be really happy with Rich Cordray.”

Some, including Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, have called for Cordray to be fired. Short of that, though, critics are content in trying to undo the agency’s work.

In July, the House voted 231-190 to overturn the arbitration rule. The Senate has until late September to follow suit. All Ohio Democrats opposed overturning the rule; Ohio Republicans supported doing so, with the exception of Rep. Jim Renacci, R-Wadsworth, who did not vote.

While arbitration is typically settled within a few months, they say, class-action lawsuits can take years to resolve.

But proponents say incidents such as Wells Fargo’s recent scandal — in which it was found to have created 3.5 million unauthorized accounts in the names of its customers — is evidence enough that consumers need to have the right to sue. They say that the new rule doesn’t ban customers from seeking arbitration — it just gives them an alternative.

Melissa Stegman, a senior policy counsel for the Center for Responsible Lending, which supports the rule, said class-action lawsuits are “far more effective” for consumers than forced arbitration and “keeps financial companies from exploiting consumers in the first place.”

Critics say the CFPB itself has undermined its defense of the rule, issuing a report finding that consumers who prevailed in arbitration recovered on average $5,389 while those who joined class actions received $32. Trial lawyers on average raked in $1 million.

But that same study also found that just 16 people a year win arbitration cash awards, and most lose, owing the bank or lenders $7,725. The CFPB also found that over five years 34 million consumers won $2.2 billion in class actions after attorneys’ fees.

While critics counter that class-action lawsuits are a giveaway to trial lawyers, Stegman has another perspective.

“Forced arbitration is a giveaway to predatory lenders and those who want to cheat consumers,” she said, “because they’re able to continue their illegal conduct.”

Others insist the rule will merely result in unnecessary litigation.

Richard Hunt, president and CEO of the Consumer Bankers Association, calls the rule “a gift to trial lawyers.”

“They’ll make millions off of each case,” he said. “In some cases, 50 percent of the monetary compensation goes to trial lawyers.”

He predicts the result will be that banking becomes more expensive.

“There will be higher litigation costs to each bank for no reason,” he said. “And the costs may be passed onto the consumers.”

Bryan Quigley of the U.S. Chamber of Commerce said while the rule doesn’t prohibit consumers from seeking arbitration, companies “are not going to have two systems” of dealing with consumers. "It’s too costly.”

“The whole point of arbitration is to try to build a dispute-resolution system that’s fast, efficient and more equitable to all parties, customers included, that doesn’t include all the processes of the court that bog down cases for years,” he said.

Sen. Sherrod Brown, D-Ohio, said despite the fact that nearly every GOP member of the Senate Banking Committee has cosponsored the Senate bill to undo the rule, “there’s a reluctance among a lot of Senate Republicans” to actually undo it. Many, he said, would prefer to “just let it die,” Brown said.

Still, if Senate Republicans press to undo the rule, “I will be leading the opposition,” he said.

jwehrman@dispatch.com

@jessicawehrman

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